The worst drought in the US in at least half a century has destroyed one-sixth of the country's expected corn crop. Soybeans, used for animal feed and vegetable oil, also suffer with the harvest at the lowest in five years. The US Department of Agriculture forecast prices for the two crops to break records this year.

By Gregory Meyer in New York and Jack Farchy and Javier Blas in London
August 10, 2012 8:35 pmFinancial Times

The worst drought in the US in at least half a century has destroyed one-sixth of the country’s expected corn crop in a month threatening a surge in global food price inflation.

The US government estimated corn farmers had abandoned fields greater in area than Belgium and Luxembourg after the hottest July in US history irreparably damaged their crops. The harvest for soyabeans, largely crushed into animal feed and vegetable oil, would be the lowest in five years.

The US Department of Agriculture forecast prices for the two crops would break records, with domestic corn averaging between $7.50 and $8.90 per bushel after this year’s harvest starts. On the Chicago Board of Trade, corn futures jumped 3.1 per cent Friday to an all-time high of $8.43¾ before slipping.

“We’re going to see very high prices,” said Joseph Glauber, USDA chief economist.

The failure of the US corn crop will hit the world’s food manufacturers, including Nestlé, Kraft, and Tyson, who have already warned that they will pass on higher prices to consumers.

The governors of Delaware and Maryland, US states with large chicken farms, on Friday urged the White House to waive a government ethanol blending mandate because of an “undersupply of corn”. Both governors are Democrats like President Barack Obama.

The surge in prices has revived memories of the 2007-08 food crisis, when the high cost of food triggered riots in more than 30 countries from Bangladesh to Haiti.

The department’s estimated corn crop of 10.8bn bushels was 2.2bn bushels less than its July projection. The US is the top producer and exporter of the world’s most heavily grown grain, so the shortfall has heightened concerns about the stability of world food supplies.

Corn is mainly used to feed animals and produce US ethanol fuel. Eyeing low supplies, the USDA forecast sharply lower consumption and exports, with the meat industry hit the hardest. Domestic red meat and poultry supplies will decline next year, the department said.

“To reduce demand like the USDA has implied, we will need to see corn prices in excess of $8 a bushel,” said Chris Gadd, grains analyst at Macquarie. Morgan Stanley said prices would need to top $10 for ethanol refiners to meet the USDA demand estimate.

Ahead of the statistics’ release, Tom Vilsack, US agriculture secretary, cautioned that the true supply picture would only emerge later this year.

“In the past, estimates have been off in drought years. We have to be cognizant of that fact,” he told the Financial Times on Thursday.

Darrel Good, an agricultural economist at the University of Illinois, warned the crop outlook could worsen as surveyors return to fields. Although parts of the US agricultural heartland have seen scattered rains in the past week, the drought continues to intensify. According to the USDA, 44 per cent of the US Midwest was suffering from “extreme” or “exceptional” drought this week, up from 36.8 per cent a week ago.

“My bias is we may have some room to go down yet on the production forecast,” Prof Good said. The USDA said farmers will harvest 87.4m of the 96.4m acres they had planted with corn.

Policymakers are increasingly alarmed by the current food supply situation. But José Graziano da Silva, director-general of the UN’s Food and Agriculture Organisation, told the Financial Times the situation was not as bad as in 2007-08.

“We do not have the demand pressure from China and India as five years ago,” he said. Stocks of rice and wheat remain high, though the USDA reduced its estimate of the Russian wheat crop due to heat and dry soils.

The US rates half its corn crop is in “poor” or “very poor” condition, the worst such assessment since 1988.